Microcredit for self employed disabled persons in developing countries

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Munich Personal RePEc Archive

Microcredit for self-employed disabled

persons in developing countries

Mersland, Roy

Atlas Alliance, Norway

October 2005

Online at

https://mpra.ub.uni-muenchen.de/2068/

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Microcredit for self-employed

disabled persons in developing countries

Input to donors, microfinance institutions, disabled people’s organizations and

advocates interested in increasing the outreach of sustainable microcredit to

disabled self- employed persons in developing countries

“When we have money, they call us by our names, not by our disabilities”1

Roy Mersland*

Commissioned by:

Atlas Alliance

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* Roy Mersland is a microfinance specialist with an extensive consulting and management

practice from the microfinance industry in Latin America, Africa and Asia. Mr. Mersland

holds a Master of Business Administration degree from the Federico Santa Maria

University in Chile and a Master of Business and Marketing degree from the Norwegian

School of Management. Besides working as a consultant he is also a ph.d. candidate at

Agder University College in Norway.

1

Lizzie Longshaw, quoted in Lewis (2004).

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ABSTRACT

Microcredit has become a popular instrument to promote economic empowerment among

poor entrepreneurs, and is increasingly being recommended to improve economic

rehabilitation among persons with disabilities. However, the majority of the advocates of

microcredit for persons with disabilities seem not to be informed on the involved “rules of

the game”. At the same time the microfinance community lacks information on disability

issues. In this report we aim on closing the gap in knowledge and culture between the

disability- and the microfinance communities. We apply resource based theory to analyze

when microcredit for disabled persons is an appropriate tool and when it is not. We argue

that asymmetric information between microfinance institutions and the disabled population

is probably the main hindrance for increased penetration of microcredit services to disabled

persons. We recommend disabled entrepreneurs with the necesarry resource base to be

included as regular clients in mainstream MFIs or as regular members in self helping

microfinance systems like ROSCAs. We provide lists of recommendations that are both

easy to understand and to apply for MFIs, DPOs and donors. Due to the lack of theoretical

and empirical knowledge available we see this report as a starting point and we advocate

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FOREWORD

Disabled persons constitute today an important target group for development efforts. At the

same time microcredit has become an important and popular tool for enhancing

development. However, when it comes to microcredit for disabled persons there is little

knowledge available. Assessments and recommendation in this report is therefore to a

considerable degree based on general economic, sociological and development theory.

Further, existing recommendations and practices in the microfinance community, as

expressed for instance by C-GAP3 is used as a point of departure. When writing the report,

the author has also attempted to take into account general recommendations on disability

issues. Additionally, considerable input has been brought into this study through our own

experience from many years in the field of microfinance.

We will encourage readers of this report to try out some of the ideas mentioned in this

paper in addition to their own ideas and thoughts. It is important to reveal what kind of

means that have an effect and document any new knowledge by for instance inviting

researchers to accompany new ventures. Hopefully, this report can then be replaced by

other more comprehensive and empirical based reports in the near future.

In this study we make use of the following definition of disability; “substantial functional limitation of daily life activities of an individual caused by physical, sensory or mental impairment and environmental barriers.”4

We appreciate the considerable input that has been brought in to the report by Terje Berg

Utby and personnel at the Atlas Alliance.

3

A consortium of 28 public and private development agencies working together to expand access to financial services for the poor (www.cgap.org)

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1. CONTEXTUAL BACKGROUND

1.1 Rationale for this study

Equalization of opportunities is according to the United Nations a right for persons with

disabilities (UN, 1993). Disabled persons are therefore (Alter et al., 1994)an important

target group for development efforts. However, even if most donor agencies express their

priority towards the disabled population, persons with disabilities continue to be a low

priority or wrong-treated target group when it comes to socio-economic integration (ILO,

2002, Lewis, 2004).

During the last decades microcredit has become an important and popular tool for

enhancing development. The year 2005 has therefore been declared by UN to be the Year

of microcredit. The question then arises; when, where and how should microcredit be

promoted for the disabled population? This study aims on providing some insight into how

to face this challenging task.

Already from the beginning of this report we will highlight our own position regarding how

prior assessment and utilization of microcredit has been made. According to our view, there

has been a tendency during the last years to see microcredit as a panacea and a magic

formula for development among poor. Such a position reveals a lack of understanding of

microcredit’s pros and cons. We also believe that it reveals an underestimation of the

enormous challenge of facilitating development for the billions of poor, particularly the

disabled among them. In this study we will therefore highlight the need for a balanced and

critical position when the issues involved are to be analyzed.

The promoters of the importance of targeting the disabled are generally social oriented

individuals and organizations without comprehensive economic and financial knowledge.

At the same time, the microfinance community – at least some of the practitioners and

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have an economic point of departure for their analysis. It is the aim of this study to bridge

this gap in knowledge and cultures. Still, in this study we utilize a commercial approach

when assessing microcredit for the disabled population. We therefore employ commercial

terms and economical analysis in the report. For the readers coming from the traditional

groups focusing on disabled persons’ rights and development, this approach might be

unfamiliar and in some cases even frightening. Nevertheless, we believe that if the disabled

population is to be included as regular clients in microfinance institutions in the long run,

this group must be assessed as a market segment based on economical rationale.

1.2 A prioritized target group for development efforts

“People with disabilities face numerous barriers in realizing equal opportunities; environmental and access barriers, legal and institutional barriers, and attitudinal barriers which cause social exclusion. Social exclusion is often the hardest barrier to overcome, and is usually associated with feelings of shame, fear and rejection. Negative stereotypes are commonly attached to disability. People with disabilities are often assigned a low social status and in some cases are considered worthless” (DFID, 2000, p. 5).

Hence, there are good reasons to have disabled people as a prioritized target group for

development efforts. However, it often seems to be forgotten that disabled persons are not

necessarily destitute. Many disabled persons take action to improve their own lives. Many

have proven their capability to run businesses on their own account. Nevertheless there are

still much to be done to secure that small enterprise schemes and microfinance institutions

(MFIs), recognize this potential and actively seek to support its development (DFID, 2000).

People with disabilities, especially those with permanent limitation in their daily activities

due to their disability, are in need of interventional strategies that can improve their

condition on a permanent basis. General recommendations for interventions aiming at

improved living conditions for disabled people do therefore highlight the importance of

including disabled persons into mainstream private and public services and development

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access to microcredit should therefore focus on including the disabled into existing

microfinance sustainable systems. According to our view, there are only two appropriate

systems available, the institutional system and the self-helping system. These approaches

are discussed in detail in chapter 6.

1.3 Between participation in economic growth and social protection

A common assumption about persons with disabilities is that they are economical inactive

and cannot be expected to work. However, many working age persons with disabilities can

and want to work, and do not wish to be considered “welfare cases”. However,

Self-employment in developing countries can be harsh and many times, also for non-disabled

persons, harmful for the health. Many disabled persons must take especially care of their

health to avoid further aggravation of their disability. These considerations are particularly

important to bear in mind when promoting self-employment for disabled persons living in

countries with lacking efficient social security systems. Many disabled persons are in need

of social protection, and we will warn against forcing or tempting disabled persons into

types of self-employment that might be harmful for their future health. We will also warn

against any attempt to utilize microfinance as a substitute for social policy. Most traditional

social protection policies can not be replaced by microfinance.

1.4 Microcredit, only one of many microfinance services

This study is mainly about microcredit, but it is important to highlight that microcredit is

only one of many financial services needed by the disabled population. Access to safe and

convenient savings, money transfer systems and insurance facilities is probably as

important as microcredit. For disabled persons we believe that such services are of

particular importance. We have therefore included some basic and brief oversight on these

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2. PEOPLE WITH DISABILITIES

2.1. Market size and characteristics

Disabled persons represent an enormous market. Global estimates of disability indicate that

about 10% of a given population can be defined as disabled (World Bank 2002, as quoted

in Dyer 2003). In some developing countries, up to as many as one of every six of the poor

can be categorized as disabled. (Elwan, 1999). Further, more than 80% of people with

disabilities live in developing countries.

Poverty and disability are often interrelated (DFID, 2000, ILO, 2002, NORAD, 2002). “It is often noted that disabled people are poorer, as a group, than the general population, and that people living in poverty are more likely than other to be disabled” (Elwan, 1999, p 1). However, this does not mean that all disabled persons are poor. Disabled persons are by no

mean a homogeneous group. Persons with disabilities vary regarding to type and extent of

disability, access to networks and resources, economic power and degree of being

empowered. Further, disability does not only affect the person itself, it also affects the

family, the networks and the surrounding in general. It is estimated that as many as 29% of

all families live with disability (Elwan, 1999). This market size makes disabled persons and

their families an interesting segment for all enterprises, particularly in this case for MFIs.

2.2. Categories of persons with disabilities

Persons with disabilities are as mentioned not a homogenous group. Nevertheless a

classification based on a disabled person’s ability to run a viable business and fulfill any

repayment commitment, can be useful. For the purpose of microcredit for self-employed

disabled persons, we chose to segment the market into five groups:

1. Persons with disabilities with existing viable businesses and with established access

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2. Persons with disabilities with existing viable businesses, but without access to

microcredit.

3. Persons with disabilities with existing, but still not viable (from a banking point of

view) businesses.

4. Persons with disabilities without existing businesses, but with the necessary

resource base5 to run viable businesses

5. Persons with disabilities without existing businesses and without the necessary

resource base to run viable businesses.

A classification like this will always be a simplification of the reality. A particular concern

is related to the fact that subjective preferences will influence the classification. In worst

case a classification as the one presented here can be used to further stigmatize the disabled

population. Nevertheless, a classification is necessary to enable the design of efficient

interventions, but this should go hand in hand with capacity building of the ones being

responsible for the classification. In the following we provide some input for intervention

strategies within each category.

Category 1: Persons with disabilities with existing viable businesses and with

established access to microcredit.

At first glance one might think that this group should not be a core target group for

interventions to increase outreach to the disabled population. We claim the contrary. This

group is maybe the most important when it comes to changing the existing organizational

culture in MFIs. This group can also serve as a benchmark for other groups and show other

persons with disabilities that microcredit can be an efficient way to increase their income

from their business activities. We therefore recommend any effort that can display the

success of persons with disabilities holding microcredit loans.

Category 2: Persons with disabilities with existing viable businesses, but without

access to microcredit.

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This group should benefit from access to microcredit on equal terms with able persons.

Throughout this report we present the mechanisms hindering equal access as well as we

present how these excluding mechanisms can be confronted.

Category 3: Persons with disabilities with existing, but still not viable (from a banking

point of view) businesses.

This is a group that must be handled with much care. MFIs aiming on their long term

sustainability should only be dealing with clients running viable businesses. For persons in

this group a loan can easily end up in a debt trap where the business fails, but the loan will

still have to be repaid. MFIs should therefore not be forced or tempted to give loans to

persons with disabilities in this group. However, one must also understand that accessing

the viability of a business and the repayment capacity of a potential client is not easy. Due

to misjudgments or prejudices many persons with disabilities can easily be categorized into

this group while actually belonging to category number two. A common mistake when

screening persons with disabilities is that the credit officer may fail to assess the total

resource base of the potential client. Inexperienced evaluators may have difficulties in

assessing the real abilities of a disabled person. Hence, evaluators must be trained to see

through the disability to be able to see the ability of an entrepreneur.

Another potential mistake is the inclusion of clients from this category into sustainability

oriented MFIs. This is frequently promoted by donors or advocates of persons with

disabilities’ rights with limited knowledge regarding microfinance. This can both put the

sustainability of the MFI in danger at the same time as it may lead the persons with

disabilities into a debt trap. For this group we therefore recommend a throughout

assessment to verify if the persons with disabilities really belong to this group, and if this is

so, that other interventions like for instance training in business skills or access to equity

capital are considered.

Category 4: Persons with disabilities without existing businesses, but with the

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This category is definitely interesting when it comes to making a living from

self-employment. That does not, however, mean that this category should necessarily be a target

group for microcredit. From a sound financial point of view debt is normally for working

capital for existing businesses or assets that can be collateralized. Research also indicates

that the probability of survival is rather limited for new organizations in general (Freeman

et al., 1983). Stinchcombe (1965) labeled this phenomenon the “liability of newness,” and

argued that new organizations’ general resource poverty, lack of legitimacy, and weak ties

to external actors provide them with reduced capacity when competing with established

players. This “liability of newness” is also well known in the informal sector. MFIs should

therefore be very conservative when dealing with start ups. Credit to this category should at

least partly be backed with income from sources beside the new business. If this is not

possible we recommend strategies aiming on injecting equity capital into the new

businesses or guarantee schemes that can cover part of the risk involved for MFIs willing to

serve this group.

Category 5: Persons with disabilities without existing businesses and without the

necessary resource bases to run viable businesses.

For this group, at their current existing resource base, self-employment is not

recommended. For many in this group self-employment is without reach. Nevertheless for

some in this group self-employment can be within reach if their resource base, particularly

their networks, can be mobilized.

2.3. Income options for persons with disabilities

Persons with disabilities, as others, can earn their income from employment or

self-employment.6 So far, it seems that most “think tanks” on economic rehabilitation for the

disabled have concentrated their efforts on employment promotion (ILO, 2002, UN, 1993).

We consider that this bias towards employment promotion is due to the fact that most fights

for the equalization of rights have been fought in developed countries where employment is

more common than self-employment. In developing countries, however, self-employment

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is considerable and in many countries more than 50% of the work force will be

self-employed. In particular for the disabled in developing countries self-employment is often

the only option due to exclusion mechanisms in the society that hinder the employment

option.

2.4. Ownership and self-employment

All over the world poor people have been grouped together to form cooperative businesses.

This has also been the case when it comes to disabled persons. We admit that in some cases

a business owned and operated by disabled persons together can have a marketing

advantage in some specific markets. However, our experience is that such enterprises, if not

very well connected,7 will rarely be an economic success. A cooperative owned enterprise

can in some specific situations be a competitive advantage, but in most cases a private

owned enterprise will outperform the cooperatives due to the personal incentives involved

(Hansmann, 1996). We therefore recommend that disabled persons, when assessing

self-employment, are generally motivated to run their private owned business. If others are to be

involved, these should be trusted persons that can benefit the enterprise by means of

competences, networks, reputation etc.

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3. THEORETICAL FRAMEWORK

Though environmental influence on organization survival is well documented (Aldrich,

1979, Sandberg and Hofer, 1987, Freeman et al., 1983, Hannan and Freeman, 1977,

Gartner et al., 1998, Cooper, 1993), research has shown that successful management of

internal resources can significantly improve venture performance and the likelihood of

survival (Shephard et al., 2000, Boeker, 1989, Hambrick et al., 1996, Hambrick and Mason,

1984, Smith, 2002). However, for companies in general and start-ups in particular, the

resource base has to be frequently extended and renewed. Hence, the ability to acquire and

maintain resources is key to survival of firms (Pfeffer and Salancik, 1978).

According to Barney (1991) firm resources can be classified into three categories: physical

capital resources, human capital resources, and organizational resources. Physical capital resources include the firms’ physical assets such as equipment an access to raw materials etc. Human capital resources include individual skills and capabilities associated with the people working in a company. Organizational capital resources include informal relations among people within a firm and between the firm and its environment.

Although this theoretical framework is developed based on insight from businesses and

companies in regularly markets, the logic is applicable also in developing countries and for

disabled entrepreneurs in particular. Let us illustrate this by means of an example of a

disabled person opening up a little shop to sell soft drinks. First, this entrepreneur needs the

soft drinks she intends to sell. To purchase the soft drinks she needs an object of exchange.

In many instances this means that this entrepreneur needs money. Further, she needs a

location for this venture. This may be a room in her house or a rented place. These

resources are examples of what Barney (1991) labels physical capital resources. An

entrepreneur is in need for many such resources and the usual way of acquire these

resources are by means of money transactions. Secondly, the entrepreneur needs to possess

the adequate knowledge and skills to run a store. She needs to know how to set prices, how

to keep the right stock on hand, how to keep her accounts right etc. Such resources are

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be achieved through training and education. Finally, having the right skills and the money

to purchase the necessary resources, our entrepreneur needs to get in touch with suppliers

and customers. In many instances the entrepreneur has a family member or a friend that

knows someone that sells soft drinks. Further, another acquaintance may have a car and

will bring the soft drinks to the store. Such social relations or “networks” may constitute

valuable and necessary resources for our entrepreneur to start her venture. These resources

fall within the category which Barney label organizational capital resources.

In order to create a viable business, an entrepreneur needs resources within all three

resource categories. We can simplify this by advocating that a viable company needs

resources according to the three C’s; Competence, Capital, and Contacts. First, one needs

the competence necessary to perform the tasks the micro-entrepreneur is supposed to carry

out for the customers. Second, the micro-entrepreneur needs capital to buy raw materials,

rent a stand in the market etc. And finally the micro-entrepreneur needs contacts to get in

touch with the customers of its product/services and the suppliers of raw materials etc.

In this report we focus on the provision of physical capital resources necessary for creating

viable businesses. That is, we focus on how the disabled persons possessing the necessary

competence and contacts may utilize microcredit in order to enhance their chances of

success and survival. Still, we do not advocate for the use of microcredit in isolation.

Hence, in the next chapter we discuss means of enhancing and improving self employment

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4. INTERVENTION STRATEGIES TO INCREASE

INCOME FROM SELF-EMPLOYMENT

Due to the enormous attention microcredit has received during the last couple of decades

one can easily be led to believe that this is the only, or at least the most efficient,

intervention method available to help poor entrepreneurs to increase their income from

self-employment. This is definitely not allways the case. Microcredit may not be the best suited

instrument when the entrepreneurs lack resources within other resource categories. In the

following we will present some commonly used strategies to facilitate for the establishment

and maintenance of entrepreneurial ventures. Later in this report we will discuss when

microcredit can be an efficient strategy and when other strategies should be applied.

4.1. Improved access to markets

The donor community has spent considerable amounts on sewing machines, vocational

training and organizational issues just to find out that there was no market available for the

ventures involved. Doing business is about selling products and services on a local,

regional, national or international market. Often, especially in rural areas, there is no easy

access to the market. Further, even if there is a market available, the business might not

present enough competitive advantages to survive in a competitive market.

The fair trade initiatives we have witnessed during the last decade or so is an honest try to

give poorer entrepreneurs access to western markets.8 Other initiatives aim at bringing

products from rural to urban markets; facilitating the construction of markets; make

transportation available etc. A particularly important strategy to improve an entrepreneur’s

access to market is to facilitate relevant information she can use to improve her business

and/or reach out to new customers.

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4.2. Improved access to technology

Technology changes are fuelling economic growth. At business level, improved technology

makes it possible to increase the efficiency and become more competitive. One important

benefit from microcredit is that this makes it possible to invest in assets with a more

efficient technology. Interventions that make available more efficient technologies for poor

entrepreneurs will therefore theoretically be of benefit. However technology without skills

is of no use. A sewing machine won’t bring much benefit if the person involved doesn’t

know how to operate it.

4.3. Improved skills

There are particularly two types of skills needed to become successful in business;

vocational skills and business skills.

a. Vocational skills

Training in vocational skills has been, and still is, a major component in thousands of

development projects, especially so for the ones aiming on the disabled population.

Vocational skills are important, but there seem to be a lack of understanding which skills

are demanded by a market. How many low quality tailors, basket weavers or soap makers

are needed in a global market? Probably less than the millions trained through various

donor funded programs at many locations in the world today. Further, an increased supply

of expertise in certain areas will, when the demand for the products is held constant,

increase competition and thereby drive prices down. Increased competition raise the

probability of bankruptcy for the companies involved and increases unemployment among

experts within the specific fields. Hence, efficient vocational training must be based on

demand in a market in addition to the personal skills and preferences of the persons

involved.

b. Business skills

Self-employed need business skills. When introducing poor women to business, Pact’s

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(PACT, 2004). This simple sentence provides very good common sense when it comes to

the viability of a business. It often seems like such basic lessons are forgotten in

development projects aiming on self-employment. We believe that general business skills is

widely lacking and projects aiming on providing such skills can have the opportunity to

become both efficient and effective.

4.4. Improved self-esteem

Successful self-employed persons have often a high degree of self-esteem. One needs to

believe in oneself to be successful in business. Any efforts that can lead to improved

self-esteem can therefore easily end up being beneficial for entrepreneurial ventures.

Particularly so for disabled people that due to pre-justice and low degree of empowerment

often have low self-esteem.

4.5. Improved access to capital

Finally, we now end up assessing how access to capital can be of benefit for the act of

entrepreneurship. But first it is important to understand that access to capital is not limited

to loans, we must also include equity.

a. Equity capital

Equity capital is needed in all business ventures. No business should run only with the help

of external capital. To be committed to the venture, the entrepreneur needs to share both the

upside and downside of the business. Further, it will be much easier to obtain external

finance when the entrepreneurs themselves provide some of the capital needed. That is, an

investor, including a MFI, will be more afraid of the entrepreneur acting opportunistically

and therefore more reluctant to invest or give out a loan, when the entrepreneur does not

have a stake in the venture. Hence, internal capital is needed to create viable businesses.

This is a major challenge for poor people. Nevertheless this basic financial reality should

not continue to be ignored in development efforts. Doing so will only create an unsound

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loans (MFI). Access to equity can be done through self accumulation (savings) by the

person herself or it can be provided from others. Once again this highlights the importance

of developing safe and convenient savings possibilities, but is also leaves us with a

question: When and how can poor entrepreneurs be provided with equity?

New businesses face a whole series of difficulties and pressure. In addition, their cash flows

situation is in general weak. A totally structured loan repayment schedule, as most

microcredit schemes present, can therefore often be a fatal factor for new ventures. Equity

funding is therefore generally preferred for start up businesses (Sonfield and Barbato,

1999). This knowledge seems to be nearly entirely lacking within the field of microfinance.

We believe that there are three factors leading to the dominating role of loans instead of

equity within microfinance:

1. General financial knowledge is lacking within many promoters of microfinance.

2. Equity support, at least as grants, is obviously more difficult to fund than loan

support. This is also in conflict with the general trend of demanding sustainability in

all kinds of development efforts.

3. It is more difficult to design provision of equity in such a way that responsibility

among the recipients can be assured.

We will return to the nature of debt in the next chapter, however, we want to highlight that

provision of equity is generally overseen when it comes to capital provision for micro

entrepreneurs. We believe that the challenge lies in designing provision of equity in such a

way that it seems nothing like charity, but becomes a real financial tool.

When it comes to the provision of equity to poor entrepreneurs, this can basically be

provided either as grants or as venture capital. We will look at the latter alternative first.

Venture capital for micro entrepreneurs is generally speaking an unknown area when it

comes to micro- and small enterprise development in developing countries. In essence,

venture capital refers to investor buying shares in young and growing unlisted companies.

That means that the venture capitalist becomes a co-owner in the business. In general,

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that yield high profits on their investment. Venture capitalists do therefore conduct

extensive screening before placing a new investment. In many countries various approaches

to venture finance have been tried out by means of governmental intervention and funding

to enhance the probability of survival and success of entrepreneurial ventures. The question

then arises; may the concept of venture capital be employed to develop micro-businesses?

This is an interesting avenue not yet explored by researchers and practitioners. Still,

extensive research are committed within the field of venture capital and this may be an

valuable source for developing similar concepts for micro enterprises in developing

countries.

Equity can also be provided as grants. This way of providing poor people, particularly

disabled persons, with the needed capital to become self-employed is tempting for many

donors. Provision of equity through grants will however not be efficient if there is not a

throughout pre-investment screening process installed. From this point of view, we believe

that there is much to be learned from venture capitalists and their screening methods. A

throughout screening process of the person and business idea involved is needed. Of

particular importance is assessing the resource base of the person involved.

A general problem with most development programs providing equity-capital seems to be

their general lack of business structure and monitoring. In their training module C-GAP

gives the following guidelines for micro-grants:

- include a graduation process

- is carefully structured and monitored

- is linked to training or mentoring

- Encourage savings

- Requires a cash contribution from the recipient

We also believe that micro-grants should be designed in such a way that it enables the

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There are few examples of well structured micro equity schemes. However, Pretes (2002)

presents an interesting exception. For many persons with disabilities interested in

self-employment, micro-equity, either as grants or as investment, may present a more efficient

solution to their capital need. We therefore recommend that parties interesting in promoting

self-employment for persons with disabilities invest in research and pilots to document

knowledge within this area.

b. Provision of debt (e.g. microcredit)

Finally, we now reach intervention through debt as a tool to strengthen self-employment. In

the following chapters we will try to provide knowledge of microcredit and its relevance for

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5. MICROCREDIT KNOWLEDGE

5.1. Microcredit is a contracted debt

Among many promoters of microcredit there seem to be a general misunderstanding of

what microcredit really is. Microcredit is a contracted debt that needs to be repaid with

interests within the accorded time. Most policy guidelines (e.g. the different C-GAP

guidelines) recommend that the interest rate should cover all the involved costs. This may

easily lead to very high interest rates since the involved costs of offering microcredit are

generally high9. Others argue that the interest rate, as many other public goods, can in some

cases be subsidized (Aghion and Morduch, 2005). However all seems to acknowledge that

at least the initial loan amount must be fully repaid. This is what makes microcredit distinct

from grants.

The understanding that microcredit is contracted debt is fundamental when promoting

microcredit for the disabled population. Promoters, especially donors, must be fully aware

that by contracting debt the persons with disabilities takes on an additional burden. “Credit is also dept, and constitutes a risky strategy for the poorest and most vulnerable to economic stress.” (Montgomery, 1996 p. 292,). Also David Hulme expresses this concern in his article called “Is microdept good for poor people? A note on the dark side of microfinance” (Hulme, 2000). See also (Hulme and Mosley, 1996) for a better understanding on these issues.

5.2. The financial nature of loans

Loans are in general best suited for ongoing businesses. This is also highlighted by C-GAP:

“Microcredit is generally most appropriate where ongoing economic activity and sufficient household cash flow already exist, as it may otherwise create an excessive debt burden.”10

The nature of a loan is that such funding will normally be for assets and activities with

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There are basically four costs involved in offering microcredit: Operational cost, financial costs, default costs and equity cost (program surplus). Particularly the operational costs can be very high since the cost involved in administrating small amounts of loans is very high.

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limited risk. In general, debt prices (interest rates) are reflecting high repayment rate on the

debt portfolio. For more risky investments (where repayment rates are lower due to higher

probability of bankruptcy), equity is more common11. Thus, equity finance is normally

needed for new ventures, new product developments, research etc. This is also reflected in

sustainable microfinance institutions. Such institutions do generally target persons with an

existing income stream. Normally, most of the repayment capacity will be calculated based

on existing income streams and not on possible income streams coming from the new asset

being purchased with the new loan (Aghion and Morduch, 2005). Accordingly, microcredit

for disabled persons should normally target persons with existing businesses with positive

cash flows. Such businesses may be ongoing business as shops, small farms etc. held by

disabled persons.

A particular criticism of most microcredit is that the loan term does not match the income

stream from the asset being purchased. A four months loan with fixed monthly installments

is not suited to finance an immature buffalo that can first start to produce income (milk,

calves, draught animal etc.) after more than one year. With the existing microcredit

technology most microcredit offered today is designed to finance working capital in

commercial activities. This means that if persons with disabilities are to get loans from

most MFIs they should be involved in businesses that produce an immediate income stream

allowing for starting to pay installments within 1-4 weeks.

5.3. Rationale for microcredit

The most common rationale behind microcredit is that people need access to more capital

than what they can accumulate through their own savings. This rationale is the same as the

rationale for a regular company where too little debt may easily lead to capital starvation

and sluggish growth. Microcredit enables poor households to increase their productive

capital. By increasing their capital such households can invest in new productive assets that

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can be used to increase the volume of their businesses. Increased access to capital also

makes it possible to invest in new and more efficient technologies, to take advantage of

business opportunities, to cope with business cycles (e.g. farming) and to engage in capital

intensive marketing activities like for instance selling their products on credit.

At the macro level, studies also show that well developed banking systems have a positive

impact on economic development (King and Levine, 1993). Efficient microcredit schemes

can therefore have a positive effect on a country’s economic development.

5.4. Social Impact of microcredit

When it comes to access to microcredit, studies show that this can have a positive social

impact for the clients, but studies also show that the level of impact depends among others

on the following factors:12

- There is greater impact on clients who begin with more financial, physical,

or social resources than on clients starting with a very limited resource base.

- There is greater impact on clients who have been clients for a longer time

than on clients who have been clients of MFIs for a short time. This calls for

sustainable institutions that can provide services through time.

- There is greater impact on clients living in stable socioeconomic and

political conditions than those living in unstable conditions.

With the knowledge that microcredit often will not generate much impact and in some

cases, especially on the poorest segments, can even have negative impact (Hulme, 2000),

there has been an increasing claim for sustainable multi-service institutions that can provide

poor people with banking services on a long term basis. This has led to the promotion of

the institutional scheme instead of more “ad-hoc” type of microcredit schemes. This is in

turn leading to a professionalization of the actors and the slow emergence of what is now

referred to as the microfinance industry. C-GAP is an important promoter of the

institutional scheme instead of “ad-hoc” schemes. The different types of microfinance

schemes are discussed in the next section.

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6. TYPES OF MICROCREDIT SCHEMES

Microfinance is practiced in a variety of ways and the difference among the ways is

considerable. We divide the practices in three main groups; self helping schemes,

institutional schemes and “ad-hoc” microcredit. There is no clear dividing line between the

three schemes and often a microfinance model can be a combination of two or even all

three schemes. In the following we explain each scheme.

6.1. Self helping schemes

This is the most common form of microfinance practiced through centuries by people all

over the world. Self helping schemes are often referred to as ROSCAs (rotating savings and

credit associations) or ASCAs (accumulating savings and credit association). In these

schemes people form their own groups, typically 15-30 persons, where they regularly, often

weekly or monthly, pool savings and distribute these as loans among the members. The

difference between a ROSCA and an ASCA is that in a ROSCA the pooled savings is

distributed among the members as a prize and where each member receives the “prize”

before starting a new round. In an ASCA the savings are accumulating and given out as

loans, normally with interest, to some of the members based on pre-established criteria.

One often tends to forget these traditional schemes, but they represent an interesting and

efficient banking model for poor people. Informal traditional schemes like ROSCAs and

ASCAs have been around for more than 1200 years (Fikkert, 2003) and now exists in

virtually every village in developing countries (Ashe, 2002).

The fact that different forms of self helping groups, here referred to as ASCAs, have

existed through centuries without any form of outside support indicates that this scheme is

highly valuated by poor people. From this we can deduce that poor people themselves

experience positive impact from participating in such groups (Rutherford, 2000). This is

probably why the modernization of the self-helping schemes has attracted considerable

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One should beware of that the traditional ROSCAs and ASCAs are often inefficient.

Transparency can be low and failure to repay savings to members can be high. Ashe (2002)

therefore recommends that donors should aim at modernizing the traditional schemes so

that they can be more transparent and efficient and thereby be a better vehicle for economic

empowerment among poor (Ashe, 2002). On the other side, Bouman (1995) warns against

intervening in these traditional schemes fearing that such donor intervention might weaken

these independent schemes (Bouman, 1995). During the last decade some important

modernizing efforts have taken place and generally these seem to have generated a positive

influence on the traditional schemes making them more transparent and efficient. Examples

are Care International’s village savings and loan programs in Africa (Allen, 2002) and

Pact’s program called Worth (Ashe and Parrott, 2002).

6.2. Institutional schemes

The institutional scheme observed today13 started out about three decades ago with

organizations offering microcredit not unlike what we call “ad-hoc” microcredit (see

below). Today this is the scheme promoted by most microfinance technologists and

observers. In this scheme microfinance is gradually growing into becoming a type of

banking industry for poor people. Still the participants heavily disagree on how this

industry should look like and if there should be a for-profit investor focus or a more social

oriented, but still sustainable focus. One of the main theses in this scheme is that

microfinance must be delivered through specialized and sustainable institutions often

referred to as MFIs (microfinance institutions).

Microcredit is still, at least in most areas, the most common microfinance service, but the

promoters of the institutional scheme increasingly promote multi-services like loans,

savings, money transfers, insurance etc. Sustainable interest rates and high repayment rates

are fundamental pillars in the institutional scheme. Microcredit is normally organized as

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standardized methodologies, either as individual loans, solidarity loans (where a group of

commonly 4-8 persons guarantee the loans for each other), or village banking schemes.14

Despite that it has been demonstrated that microcredit does not always fulfill the

expectations when it comes to impact, poor people continue to heavily demand such

services. One should, however, know how to distinguish between the demand for

microcredit provided by sustainable institutions and “ad-hoc” programs. Often when poor

people and/or disabled persons express their need for microcredit to a donor agency they

have subsidized credit in mind. They will not necessarily be willing to pay for the services

when provided by sustainable institutions claiming high interest rates on the loans.

6.3. “Ad-hoc” microcredit

“Ad-hoc” microcredit is what many non-specialists have in mind when they think about

microfinance. The idea is that by providing a poor person with a one-time loan the person

will invest this amount in a business, often a start up of a new business, and with the help of

this business the person will be able to work herself and her family out of poverty. High

repayment rates is not a major issue since the focal point is more on the sustainability on

the poor person’s level (ability to generate a sustainable business through the loan), and not

the institutional level. Interest rates are often subsidized. The focus is often on special

groups like disabled persons, rural women, victims of conflicts etc. In “ad-hoc” programs

microcredit is often only one of many components (training, health services etc.) all aiming

on empowering the special group in mind. Most existing practices of microfinance for

disabled persons can be catalogued as “ad-hoc” microcredit.

Most microcredit initiatives have been, and are still being, set up by social oriented persons

and organizations with little banking knowledge. The focus has been, and often still is, on

serving the poor people’s need of today and not on building institutional governance

mechanisms that can protect and develop the microcredit provider during the decades to

come. With the understanding that efficient microfinance services should be provided by

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sustainable institutions, there has been a growing understanding that institutions providing

microfinance should be specialized institutions and not multipurpose organizations like

social NGOs, disabled persons’ organizations (DPOs) or churches. If multipurpose NGOs,

DPOs or churches are to participate in developing microfinance, this should be as a

promoters and protectors of microfinance programs and not as a provider of such services.

Most “ad-hoc” types of microcredit activities that we know of have not been able to

generate much long term impact. We will therefore recommend that institutions interested

in promoting self-employment for disabled persons should not engage in ad-hoc types of

microcredit. There is little evidence that such involvement will benefit the persons involved

in the long run. Only activities that can be catalogued as self-helping microfinance schemes

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7. MICROFINANCE SCHEMES AND DISABLED

PERSONS

People in general relate persons with disabilities to the lack of resources. Accordingly,

disabled entrepreneurs are often regarded as having competitive disadvantages due to

increased labor cost (e.g. the need for hiring a person to carry merchandise instead of

carrying it oneself, transportation cost, slower production etc.). In some cultures, due to

prejudice, superstition etc., being disabled can also result in a marketing disadvantage since

consumers might not want to contract products or services from disabled entrepreneurs.

Hence, being disabled may turn into a competitive disadvantage when a disabled

entrepreneur faces the competition from non-disabled entrepreneurs. Nevertheless, the

resource deficit as it is perceived by others may not reflect the real resource constrains

associated with disabled entrepreneurs. It is therefore important to assess the real resource

base and not only the perceived resource base when dealing with persons with disabilities.

However, the resource demands for disabled entrepreneurs are in general significant and

may be harder to obtain than for non-disabled entrepreneurs. This may include resources

within all the mentioned resource categories. Insights from resource based theory are here

in line with major findings when it comes to impact from microcredit which indicates that

there is greater impact on clients who begin with more financial, physical, or social

resources than on clients who start from a very low resource base.

Disabled persons are generally underserved when it comes to microfinance services. The

penetration of microfinance services, particularly microcredit, to disabled persons is

generally very low (Lewis, 2004, Hulme, 2000). In this section we focus on how

microcredit may help disabled entrepreneurs to enhance their chances of creating and

maintaining viable businesses. We first look at how various market mechanisms both

augment and limit the market opportunities for disabled entrepreneurs. We then look for

different explanations to why the poorest are often excluded from microcredit services.

Further, we make use of general economy theory to analyze challenges in the supply and

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7.1. Mechanisms benefiting persons with disabilities

In some cases persons with disabilities might “benefit” from some market mechanisms like

for instance consumer behavior preferences. With all other things equal some consumers,

due to a feeling of solidarity or compassion, might want to prefer doing business with

persons with disabilities instead of with non-disabled persons. Consumers might prefer to

shop in stores run by disabled persons, prefer furniture made by disabled persons or have

their shoes repaired by disabled shoemakers. This market mechanism must be taken into

account when assessing the resource base of a disabled person. One must though bear in

mind that this market mechanism varies in different cultures. Some cultures present a

higher degree of solidarity while others have less.

Related to the previous mechanism is the information advantage experienced by some

persons with disabilities. Many disabled are often well known persons in their community.

“Everybody” knows about them. This information advantage can in some cases result in a

marketing advantage working for the benefit of the disabled person and her business.

Another mechanism often forgotten when assessing disabled persons´ resource bases is the

network associated with people with disabilities. Many persons with disabilities benefit

from many helpers, family members, community members, social workers etc. If the

network stands up for the disabled this may form a powerful team. A blind person in

Uganda once told me; “Remember Roy, I can also run a shop.” Particularly in developing

countries the whole family often participates in business ventures. A blind person can easily

be in charge of a shop and be responsible for the involved strategic decisions. At the same

time family members might want to back up a disabled person by financial contribution.

The mechanisms mentioned above are of course not as widespread that disabled persons in

general are provided with more resources than what is perceived. However, we want to

highlight that MFIs when screening potential disabled clients should include the total

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7.2. Mechanisms excluding persons with disabilities

Simanowitz (2001) describes four mechanisms that lead to the exclusion of the poorest

from microfinance services. The four mechanisms suggested by Simanowitz are

self-exclusion, exclusion by members, exclusion by staff and exclusion by design (Simanowitz,

2001). We believe that these four mechanisms are also the ones hindering persons with

disabilities from being included as regular clients of MFIs. In the following, insight from

Simanowitz’s framework is employed and adapted to persons with disabilities.

Self-exclusion.

Self-exclusion is the lack of self confidence and knowledge regarding how the services can

be beneficial to the individual. This may be a particular problem for persons with

disabilities. During life persons with disabilities may experience a considerable amount of

exclusions and rejections, which may affect their behaviour regarding services like

financial provisions. This accumulation of exclusions produces secondary incapacities like

lack of self esteem etc. This can easily lead to self exclusion from microcredit by persons

with disabilities (ILO, 2002).

Another type of self-exclusion is the expectation of some disabled persons and their

families to constantly receive charity (Thomas, 2000). Such attitude is incompatible with

sustainable MFIs and will naturally lead to exclusion by the MFI of such potential clients.

Exclusion by other members.

Most MFIs use different types of group methodologies for microcredit like self helping

groups, solidarity groups, village banking etc. These methodologies are based on

self-selection of members. A core element in group methodologies is that all members are

jointly liable for each individual’s loan. There is therefore an increased likelihood that

poorer and more vulnerable members tend to be excluded from such groups. There are also

studies showing that poorer persons that do join a group have a shorter membership time

than average (Montgomery, 1996). These exclusive attitudes must be confronted both by

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Exclusion by staff.

Due to attitudes and prejudices in the society the staff of an MFI will often deliberately or

unconsciously exclude persons with disabilities. The personnel is often lacking the

necessary experience and training to distinguish the difference between real credit risk and

perceived credit risk when it comes to persons with disabilities. If an MFI practices any

form of group methodology there is also evidence that ‘staff pressure’ trigger the ‘peer

pressure’ leading to exclusion of poorer members (Montgomery, 1996). MFI staffs, and

particularly the credit officers, are therefore a core target group to influence when increased

outreach the disabled persons is the objective. Such influence should however, if it is to be

efficient, be backed by MFI´s top management.

Exclusion by design.

The credit methodology utilized by MFIs might hinder persons with disabilities in

participating. For example, weekly repayment frequency might be a higher obstacle to

achieve for a disabled person than for a non-disabled person. Another example is

compulsory upfront savings or fees sometimes as high as 20% of the loan amount. Another

major challenge in micro credit methodology is the dependence on credit history. In many

ways credit history is replacing formal demand for collateral or guarantees. The main

challenge is therefore to get the first loan so that a relationship with the MFI can be

established. To evaluate a possible client a MFI looks at personal skills and character in

addition to assessing the business. But for many Credit Officers (COs) facing persons with

disabilities, it is difficult to measure personal skills and character. Often the CO is not able

to see through the disability and recognize the real ability of a disabled person.

7.3. Supply and demand for microfinance in the disabled persons’

market

When analyzing why the outreach of microcredit to disabled persons seem to be lower than

expected in a well-functioning market, one can assess if this market mismatch is due to

problems at the supply side or the demand side of the market. Such analysis is important to

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Supply side

Disabled persons are generally speaking worthy beneficians of public and private support.

Regretfully, such support is limited in poor countries and rightfully the disabled persons

reclaim for increased attention and support from both public and private sources. However,

such reclaims turn into a problem when directed towards microfinance institutions

operating in a market and making their living through the delivery of financial services.

Such institutions have neither the resources nor the public obligation to serve the disabled

persons much differently than how they serve the rest of their customers. This could

actually jeopardize their sustainability. Nevertheless microfinance institutions, as the rest of

the society, do have the obligation not to discriminate any persons due to their physical or

physiological disabilities. The problem therefore arises when it comes to the MFI’s ability

to assess disabled persons the same way as they assess any potential client.

The selection criteria in a professional MFI should be based on the potential client’s

character, her repayment capacity and the viability of the business involved. Assessing the

real ability instead of the disability is however a challenging task even for persons and

institutions claiming that they have a non discrimination policy. As long as suppliers of

microcredit are not able to assess the real risk involved in serving a disabled person we can

conclude that interventions, aiming on changing MFIs and their staffs attitude and provide

them with the right knowledge, are needed.

However we must mention that a particular problem in most microfinance institution is

their low level of institutional sustainability. What most providers of microcredit actually

need at the moment is donors and other stressing the importance of achieving long term

sustainability. From this point of view, this report can easily be seen as just one more of the

thousands of other special interests trying to be imposed on microfinance institution. If

microcredit for poor is to be an ongoing service throughout this century, the microfinance

industry must be brought into a more sustainability oriented track. Nevertheless, the right of

equal participation in the society is a human right so strong that no institution can ignore it.

In this report we do not claim for special conditions for disabled persons, but we promote

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sustainability of the microfinance industry. Rather, disabled persons may actually turn into

an interesting market segment for committed MFIs.

In a recent study we conducted in Uganda we found the following in relation to the

suppliers of microfinance and their attitude towards including disabled persons as clients:

(Mersland, 2005)15

- All MFIs visited highlighted a non-discrimination policy

- Most MFIs did not see a reason for tracking disability specifically. This could

even distort the work of the Credit Officers whose job is to evaluate business

viability and repayment capacity and not physical ability/disability.

- The MFIs admitted that their personnel, as the society in general, probably have

a tendency to miscalculate or underestimate the abilities of a disabled person.

- All MFIs welcomed any efforts that can help them to evaluate disabled the same

way they evaluate able persons.

- The MFIs did not know about any reliable market information regarding the

disabled persons segment.

- All MFIs using a group methodology admitted that this methodology might lead

to the exclusion of disabled persons. But by having their credit officers to

promote the inclusion they would probably be able to influence the groups to

take in more disabled persons as members.

Responding to the question of why the MFIs do not have more disabled persons as clients

the following seemed to be the main answers in practically all institutions:

- “We haven’t thought of this”

- “There is probably not so many disabled persons running viable businesses”

- “We do not have any knowledge on how to serve this segment”

- “It will not be cost effective for us to specifically target this segment” (through

special loan products/methodology etc.)

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Demand side

Disabled persons in need for additional capital for their businesses often end up demanding

microcredit. However this demand requires closer analysis. Is there actually a high demand

among self-employed disabled persons for microcredit? As for the supply side there is

limited existing research to build upon. The following remarks are therefore based on our

own experiences and they should only be taken as a starting point when trying to

understand the demand for microcredit from disabled self-employed persons.

During the mentioned study in Uganda we also met with 12 self-employed disabled

persons. Our findings through meeting with these entrepreneurs confirm our findings from

meetings with other disabled persons around the globe. We therefore believe that the

following remarks are worth reviewing when trying to understand the demand for

microcredit by self-employed disabled persons.

- Most disabled persons running their own viable business prefer not to contract

microcredit, even if such service is available in their neighbourhood.

- Disabled persons often represent an enormous ability to adapt and learn. Life

has taught them to cope with challenges. Such abilities are a major asset when

contracting loans from a MFI.

- Disabled persons seem to be more risk averse than others. They are more afraid

of loosing what they have. The consequences of losing what they have might be

more dramatic. They often do not dare to take a loan.

- Disabled persons running their own businesses do not seem to understand the

pros and the cons of taking a loan. They regard loan as the last resort, something

that is only taken when things are really bad. They generally lack the knowledge

regarding when and how a loan can improve their businesses.

- Disabled persons often do not know how to approach a MFI.

- Disabled persons have often accumulated so much bad experience when it

comes to approaching offices, private or public, that they prefer to avoid such

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- Disabled persons, as many other vulnerable groups, are misinformed about

MFIs. They often believe them to be some type of social offices and not

institutions that operate (at least try to operate) under market conditions.

- Disabled persons tend to be waiting for special conditions, programs etc. coming

from the government or donors. They prefer waiting for such programs instead

of contracting loans on market conditions from MFIs.

- Disabled persons, as other vulnerable groups, tend to be misinformed. In this

case when it comes to real interest rates, collateral requirements, risks etc.

- Some disabled persons feel self pity and think that they should have better

conditions (e.g. interest rates, grace periods) than others.

- Often disabled persons believe that they are discriminated due to their disability

when the real reason for not qualifying for a loan is that they do not qualify due

to business viability and repayment capacity.

- Some disabled persons have higher costs than able persons. This can be due to

their need of hiring help, e.g. carrying merchandise, need of public

transportation instead of walking/riding a bicycle etc.

- Generally speaking being disabled is representing a disadvantage when it comes

to running a business. However, some disabled persons also admit that they

might have some “competitive advantages” (mentioned above)

Disabled persons’ organizations (DPOs)

Influencing the demand for microfinance from disabled persons are the DPOs. There seem

to be an indefinite number of different associations and organizations for disabled persons.

We believe that such organizations can play an important role when it comes to

encouraging disabled persons in their ventures. However we have also found that such

organizations may negatively influence a disabled person’s ability and motivation to be

involved in business. Due to their focus on rights and lacking conditions we believe that

these organizations can easily end up discouraging entrepreneurs with disabilities. DPOs

are simply not used to being involved in issues that is dependent merely on market forces.

The organizational culture and tradition of most DPOs is not nourished to foster such

Microcredit for self employed disabled persons in developing countries

Munich Personal RePEc Archive

Microcredit for self-employed disabled

persons in developing countries

Mersland, Roy

Atlas Alliance, Norway

October 2005

Online at

https://mpra.ub.uni-muenchen.de/2068/

Microcredit for self-employed

disabled persons in developing countries

Input to donors, microfinance institutions, disabled people’s organizations and

advocates interested in increasing the outreach of sustainable microcredit to

disabled self- employed persons in developing countries

Roy Mersland*

Commissioned by:

Atlas Alliance

ABSTRACT

FOREWORD

TABLE OF CONTENTS

1. CONTEXTUAL BACKGROUND

1.1

Rationale for this study

1.2

A prioritized target group for development efforts

1.3

Between participation in economic growth and social protection

1.4

Microcredit, only one of many microfinance services

2. PEOPLE WITH DISABILITIES

2.1.

Market size and characteristics

2.2.

Categories of persons with disabilities

2.3.

Income options for persons with disabilities

2.4.

Ownership and self-employment

3. THEORETICAL FRAMEWORK

4. INTERVENTION STRATEGIES TO INCREASE

INCOME FROM SELF-EMPLOYMENT

4.1.

Improved access to markets

4.2.

Improved access to technology

4.3.

Improved skills

4.4.

Improved self-esteem

4.5.

Improved access to capital

5. MICROCREDIT KNOWLEDGE

5.1.

Microcredit is a contracted debt

5.2.

The financial nature of loans

5.3.

Rationale for microcredit

5.4.

Social Impact of microcredit

6. TYPES OF MICROCREDIT SCHEMES

6.1.

Self helping schemes

6.2.

Institutional schemes

6.3.

“Ad-hoc” microcredit

7. MICROFINANCE SCHEMES AND DISABLED

PERSONS

7.1.

Mechanisms benefiting persons with disabilities

7.2.

Mechanisms excluding persons with disabilities

7.3.

Supply and demand for microfinance in the disabled persons’

market